Pricing strategy is often a make-or-break factor for retail firms, particularly those in the most dynamic, competitive sectors like fast-moving consumer goods (FMCG). For such firms, a price skimming strategy is often the best possible option. This involves launching a product at its highest possible price and then slowly lowering it over time to maximise profit margins early on in the product’s lifecycle.
The price skimming strategy strikes an exceptionally delicate balance between risk and reward. It can work wonderfully with the right products, such as innovative or unique items, or in situations with low initial competition. At the same time, it may also negatively affect a brand’s reputation, customer confidence, and sales statistics if the product selection, timing, or pricing is not quite right.
In short, it is a risk-heavy option, but in the FMCG sector, it can also prove fruitful, not just for retailers themselves but also for manufacturers and suppliers. Thankfully, there are ways to deploy this technique while mitigating some of the risks of the price skimming strategy, using real-time data and intelligent, structured decision-making to enjoy the advantages without the downsides.
Risks of Price Skimming in FMCG and Retail
To fully understand what is price skimming strategy, it is imperative to understand the risks it can bring. Here is an example to illustrate how skimming works in the FMCG sector:
- A men’s razor manufacturer launches a new system at a high price, with marketing to highlight the new razor’s key features and advantages. The idea is to draw in early adopters and loyal consumers who value these features and are willing to pay a premium for them.
- Over time, the price of the razor decreases, or promotions are introduced to make the system more affordable and enticing to a broader audience.
- Prices of older models are also reduced in line with the new product, eventually reaching much lower levels than they started at, making the entire product line more accessible to all.
This example illustrates both the advantages and disadvantages of the price skimming strategy. On the one hand, launching a product at a high initial price may help maximise profit per unit sold. At the same time, pricing too aggressively could affect sales in the all-important early days after the product’s launch.
This, in turn, can disrupt critical retail processes, like range reviews and SKU rationalisation. Brands may also find that their reputations suffer, with initial buyers potentially feeling exploited when they see the product’s price begin to fall, and others feel equally frustrated at feeling priced out of a new product during its launch phase.
In addition, brands may often launch new products with introductory promotions. If the promotion is not properly balanced with the initial high list price, the two opposing techniques undermine one another. The skimming strategy can turn into more of a margin-diluting penetration strategy, deviating from its original intent.
There are several additional risks of the price skimming strategy, too, such as confusing shoppers, cannibalising an existing core range of products, or creating broken price ladders in which the varying price points of a range of similar products no longer have clear logic, structure, or consistency.
How Assosia’s Capabilities Help Mitigate These Risks
Through its proven pricing tool and other data-driven services, like retail forecasting and market research, Assosia helps retail firms enjoy the advantages of price skimming strategy without having to worry about its risks and downsides.
The Assosia pricing tool delivers reliable, real-time data about products, prices, markets, competitors, promotions, and more, enabling companies to make facts and figures the foundation of their price skimming strategy. Through flexible services like competitor analysis and benchmarking, you can identify early warning signs, forecast accurately, and choose the right prices for every product launch.
Meanwhile, companies that wish to deploy price skimming alongside introductory promos can rely on Assosia’s custom promotion tracking capabilities to gather both online and in-store data. This makes it easier for clients to measure how promotion depth and frequency affect both margins and perceived premium value, providing more useful data to inform their price skimming decisions.
Protecting Brand Equity and Reputation
Assosia also provides the unique benefit of tracking price moves and step-downs across numerous retailers over time, delivering customised, in-depth reports with the data you need to plan your next moves. It helps you spot fragmented pricing or executive issues through close analysis of both historical and current data – vital for protecting against brand and reputational damage.
A Practical, Data-Led Skimming Playbook
Here is a closer look at how you can mitigate the risks of price skimming strategy to make the most of this pricing model:
Pre-Launch Checklist
A good price skimming strategy begins with careful planning and preparation. Think about the questions you need to answer before moving ahead with a skimming strategy, like:
- Is there likely to be a lot of strong early adopter demand for this product?
- How unique or innovative is the product?
- How fast could competitors respond with a comparable product?
From there, conduct relevant research with the help of proven tools and services to gain relevant evidence about the competitor landscape, the market’s willingness to pay a high price for the product in question, and so on.
In-Market Monitoring and Decision Rules
Upon launching a price skimming strategy, companies should continue to monitor the market and track performance, using data to inform their moves and adjustments as they go. Set clear rules and frameworks to assist with this.
If sales are going well, for example, you can continue to hold the price. If sales numbers are declining, that may be a sign to start skimming. Conversely, if performance is particularly disappointing, you may wish to exit the strategy entirely.
Post-Mortem and Learning for Future Launches
After implementing a price skimming strategy, it is recommended to review how it went and what you can learn from it moving forward. Assosia helps with this, providing detailed, insightful reports for you to analyse. Use the available data to inform your next launch, or prepare your own “launch pricing playbook” to refer to in the future.
Case Study: Sony PlayStation 3
Price skimming does not always go to plan, even for some of the biggest and most well-known brands in the world. A famous example of the strategy failing is the Sony PlayStation 3, a video game console that launched in 2006 at a significantly higher price than rival consoles.
This was reportedly done to attract early adopters and help the company recoup some of its hefty development costs for the product. However, many customers simply turned away from the platform, opting for cheaper competitors and committing to alternative gaming ecosystems for years to follow, rather than paying the premium price.
The console subsequently suffered slow adoption, with Sony eventually forced to slash the price far sooner than planned and introduce cheaper variants with simpler hardware to bring back some of its customer base.
Conclusion: Balancing Risk and Reward with Price Skimming Strategy
As the example above illustrates, a price skimming strategy always entails some level of risk. But it also has the potential to deliver high rewards, especially in a sector like FMCG. The key to getting it right comes down to one simple thing: data.
The more real-world pricing, promotion, and execution data you have, the more price skimming can become more of a managed business risk than an outright gamble. Assosia can help you acquire that data; contact our team today to find out how.